Comparing McDonald's To Altria Group: Which Will Provide Superior Long-Term Dividend Growth?

| About: McDonald's Corporation (MCD)

The following article will discuss the investment merits of Altria (NYSE:MO) and McDonald's (NYSE:MCD) from the perspective of a long term dividend growth investor. Dividend growth investing is an excellent strategy for the long term investor to amass a considerable nest egg through patience and what Ben Franklin stated as the eighth wonder of the world "compounding". The article will contain my three criteria for choosing the above companies along with a discussion on the likelihood their performance can continue well into the future.

The first criterion that was used was the concept of a "wide moat". A wide moat is a term Warren Buffett made popular to describe the types of companies he searches for. A wide moat is a business that has high barriers to entry that limits the amount of competitors that can enter in. Lack of competitors usually indicates some type of pricing power although this may not always be the case (think auto industry). Altria and McDonald's easily meet these criteria. To start a similar business from scratch would be virtually impossible hence offering the above some type of cushion against competition.

The second criterion that was used was the ability to dominate the industry. Both easily passed these criteria. Altria has over 40% of the US tobacco market while McDonald's is the largest quick service restaurant in the country. The ability to dominate an industry augurs well for future profit and dividend growth which is key for our long term strategy.

The third and final criterion that was used was the industries recession proof qualities. Both companies pass the final criteria. McDonald's is viewed as recession resistant due to the low cost appeal of its menu along with its strong dollar menu offerings. Altria is viewed as recession resistant due to the addictive nature of its flagship product. As we can see from the tables below earnings and dividends have grown nicely in the last 4 years in a recession and a subsequent sluggish recovery. Please note the Altria earnings in 2008 are skewed slightly higher due to the spinoff of its overseas arm Philip Morris international (NYSE:PM). Once that is taken into account we can see the trend.

MCD year ending

Earnings per share

Dividends per share

Shares outstanding in millions

















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MO year ending

Earnings per share

Dividends per share

Shares outstanding in millions

















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Source is from Morningstar reports.

McDonald's begins to show it is a better candidate when one reviews the earnings per share performance and dividend payout ratio. McDonald's has been able to grow earnings at a rather brisk pace while paying out an ever increasing dividend. Altria has also paid a progressively higher dividend rate however their earnings have stagnated over the last few years. What is more alarming from my perspective is the payout ratio which for 2011 exceeded 80%. Unless earnings accelerate in the future the pace of dividend rates will be constrained if not arrested.

Both companies face hurdles in their respective businesses. McDonald's is a global restaurant chain that has significant European exposure. As I have written about previously, a global slowdown will have an adverse impact on earnings. What intrigues me about McDonald's the most is not the food but how well it executes. Management adapts the menu to the local tastes and customs, such as in India they serve non beef burgers. McDonald's is a low cost operator whose greatest strength is consistency. The food will look and taste the same on a consistent basis which is very difficult to accomplish. Management has to be commended over the past decade as they have radically redone the menu to add more nutritious products and venture past their core competency in burgers and fries. It is the success of the new menu initiatives along with the broadening of offerings that gives me the confidence that growth will continue.

Altria largest challenge is maintaining share in an extremely profitable yet shrinking market. Tobacco usage is declining in America, coupled with the spin-off of PM to shareholders severely limits growth going forward. Altria actually began to discount its flagship Marlboro brand is response to market share loss partially responsible to the growing popularity of Newport's. As I detailed in a previous article Lorillard (NYSE:LO) was able to grow share in the first quarter without resorting to discounting which I found intriguing. Altria responded in the second quarter with an aggressive discounting campaign to arrest a slight market share decline. I find the discounting activity to be quite disconcerting and will eventually tarnish the brand. With no international growth prospects and a dominate share in a shrinking market the ability to consistently increase dividends becomes more difficult. Altria has attempted to broaden its horizon into the wine and cigar business with limited results. Going forward, I anticipate that growth will become constrained and dividend increases will become paltrier.

Chart courtesy of

In summary I prefer the opportunity that McDonald's presents over Altria. I find that its rising sales and profitability when coupled with international expansion opportunities make McDonald's a superior choice. As we can see from the chart above both have performed extremely well when compared to the S&P 500 with Altria performing the best. Granted the current dividend rate is less however with greater estimated dividend growth potential coupled with superior capital gains potential makes McDonald's the better choice.

Disclosure: I am long MCD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The article you are reading is for informational purposes only. Thank you for reading and I look forward to your comments.